Google's built a no-nonsense path to profitability by treating advertising just like search. The secret? Three words, ranked by relevance: Results. Results. Results.
Everyone loves Google, and therein lies its dilemma. The phenomenally popular search engine - it now performs more than 100 million searches a day - achieved much of its early success by being resolutely uncommercial. As other search engines were selling banner ads and turning into portals to make a buck off what had become a commodity service, Google just did search. Its stripped-down interface (only three elements: a text-entry box, a Search button, and an "I'm Feeling Lucky" link that takes you straight to the top-ranking result) trades looks for speed. And it does search brilliantly, using a unique technique that ranks pages by how many other pages link to them.
The dilemma? Behind the anti-corporate facade, Google is in fact a company - even worse, a venture-backed company - and these days that means it must find a route to profitability fast or risk failure. Given that its far more commercial competitors, from AltaVista to Ask Jeeves, have been unable to come close to positive territory (the one moneymaker, Yahoo!, started as a directory), Google's prospects might seem bleak. Yet the reality is that behind the scenes, the company is becoming a commercial powerhouse - and, says Google's newly named CEO Eric Schmidt, it's now squarely in the black.
How can that be? The answer starts with the man Schmidt refers to as his unsung hero, VP of business development and sales Omid Kordestani. Kordestani left as the head of Netscape's Netcenter in 1999 to join Google and craft the company's original revenue plan, a three-part strategy of licensing search to consumer sites like Yahoo!, developing corporate search tools for customers like Cisco, and embracing advertising.
It's not a novel business plan - many competitors work off the same book, with largely indifferent results. And indeed, licensing and corporate search are no more of a blockbuster for Google than they have been for anyone else. But the last category - advertising - sets Google apart. Odd as it may seem for a banner-free zone in a sea of Flash advertising, Google is emerging as one of the few advertising successes on the Web.
That's because Kordestani approaches advertising like his company tackles search. Eschewing banners in favor of text-only sponsored links is only part of it. Google is different because of the company's simple, dogged focus on results. Many competitors sell keywords; Google sells only keywords. Others price their keywords as they do banners, in blocks of a thousand impressions - known in ad parlance as CPM, or cost per thousand - with little concern for any return on investment beyond the promised number of impressions; Google sells performance. Rival companies rank advertisers higher if they pay more, but Google turns that model on its head: User-relevance determines where sponsored links rank, which in turn determines pricing.
If it's still tough to get excited about any ad-based business model in the great ad bust of 2001, have a look at another search engine, the underrated GoTo, for proof that advertisers value hard performance metrics. GoTo is not a Google by any means - it trails Google, Ask Jeeves, and even iWon.com in total audience - but its revenues are growing quickly, along with its market cap, which has risen nearly 300 percent this year to $1.4 billion. The reason: GoTo is selling accountability. And therein lies online advertising gold.
This is why Kordestani has suddenly become Google's man to watch. While some sites have moved away from even counting clickthroughs, much less promising them - offering instead an opportunity to experiment on different form factors, like pop-under ads and outsize boxes - he pushes results harder than ever. "The most important metric to advertisers is conversion. It may be a registration, in the case of an eBay, or a product sale for our ecommerce partners," he says from his corner office at Google's headquarters in Mountain View, California. "Everybody is so focused on return on investment."
Kordestani has even been known to give the stiff-arm when clients try to go too broad. "We actually turn away money when things are too general," he says. "Ideally, we like to sell 'auto tires' only to a tire manufacturer and 'SUV' to an SUV manufacturer. Our goal is to keep it very targeted, so that you get much more qualified users clicking on your ads."
Lately, advertisers are responding to Kordestani's message - and to his two-tiered ad plan. Google has a premium position that puts an ad atop a search page, in front of a shaded background, alone or with one other ad. (When the subject of a search request doesn't trigger a sponsored keyword, no ad will appear on the results page.) A 15-person production group inside Google helps premium sponsors optimize their search terms and continually monitors clicks.
Companies as varied as Alcatel and Amazon.com are among the more than 400 advertisers who have signed up for this service. Search for the network administrator's acronym QoS (quality of service) and you'll see an Alcatel ad. Search for the name of a particular author or performer - from Charles Dickens to Cary Grant to Louis Armstrong - and you'll see an Amazon ad.
For Google's second, automated ad program, AdWords, Kordestani and his team do sell keywords in the CPM model, but here they have a different clientele in mind - small and medium-size businesses that can create DIY text ads on the fly and pay with a credit card. And the site uses clickthrough rates to adjust the model. With AdWords, an advertiser can purchase one of the small, rectangular boxes that appear to the right of the search results on selected pages for an initial fee that ranges from a $15 CPM for the top spot to $8 for the bottom four in the list of eight. (Industry-wide CPM averages are estimated to be in the mid-to-high $20 range, according to AdRelevance, although those rates vary dramatically by category.) At first, the ads are rotated through various positions. But over time they're sorted according to their clickthrough rates. The best performers move up the chart, which means that advertisers whose ads are deemed more relevant end up paying more.
The AdWords program has attracted thousands of companies and is particularly effective, Kordestani says, because its sorting mechanism works in the same way as the PageRank algorithm; that is, bringing the most relevant ad to the top of the list. As a result, the more popular/relevant ads generate the most clicks. And everyone is happy.
To see Google's ad model taken even further, travel 350 miles south to Pasadena, where GoTo, the pay-for-placement search engine, is hitting on the same accountability message, only harder. Here, advertisers bid their way up the list of search results - the higher the bid, the higher the placement. But the real difference at GoTo is that the company's 45,000 advertisers pay only when a visitor clicks through.
GoTo is the most successful business born out of Bill Gross' idealab!, the startup incubator that also developed CarsDirect and Tickets.com. Founded in 1997, GoTo began life as a heavily promoted destination site. Despite its initial run-up on Wall Street, it seemed a strange idea at the time. Why would anyone seek out a search engine where the results were sold to the highest bidder? The company has since abandoned its goal of being a destination and focused on licensing its service to larger sites. And that has made all the difference to advertisers; they're relishing the opportunity to climb the search page at highly trafficked sites like MSN, on a pay-per-click model.
In the first quarter of this year, GoTo advertisers paid, on average, 16 cents per clickthrough, which added up to more than $50 million in revenue for the company. In Q2, revenue jumped to $62.5 million, an average of 19 cents paid per clickthrough, and GoTo announced in July that it plans to turn a $1 million profit in Q3.
Ted Meisel, president and CEO, thinks his company has tapped into a certain momentum in the ad community. So much so, in fact, that he's raising prices. "The value of the leads generated from search have been underpriced," he says. "We'd be inviting in the next competitor if we stuck around 16 cents."
But while Google and GoTo are similar in their ad message, they diverge in their approach to search. GoTo now relies on partners for 95 percent of its traffic; Google is first and foremost a destination site. Also, Google has erected a thick church/state wall between the search results turned up by its algorithms and the ads sprinkled around them on the page. At GoTo, everything is for sale. "If you just have a cost-per-click model," Kordestani says, "someone buys a 'cancer' keyword and then sells term life insurance on it. We don't want to get paid just by that metric."
Also, unlike Google, GoTo tends to attract novice users who encounter its paid results via partner sites, like EarthLink, AltaVista, and TerraLycos. Kordestani implies that this could lead to trouble for his competitor. "You buy your computer, get your EarthLink account, and off you go to the search engine there," he says. "You think you're searching the Web, but it's really paid searching. People don't realize what's happening." And indeed, this summer, the consumer advocacy group Commercial Alert, founded by Ralph Nader, filed a complaint with the Federal Trade Commission accusing GoTo partner sites - which differentiate GoTo results only by calling them "featured sites" - of deceptive advertising.
Meisel dismisses all talk of impropriety, saying that GoTo results are no more misleading than the Yellow Pages. "Users don't care how the search results are generated," he says. "They just want to find what they want, and if they can't find what they're looking for, they'll go somewhere else."
Ultimately, the key difference between the companies is probably this: GoTo is a great business model; Google is, or at least has the potential to be, a great business. But sustaining momentum in search is no easy task. Google's big licensing customers, like Yahoo!, can leave as quickly as they came - putting a serious crimp in the company's revenue stream. Couple such an event with the development of a competing latest greatest search technology, and Google may quickly find itself thinking about an acquisition, or going public, or even broadening its business model before it's ready.
For now, the company is guarding against all that by continually tweaking its product. Already, Google can handle PDF files; audio and video files should follow. Not far away is the ability to recognize a type of search and hit the proper database. Someone looking for Madonna, for example, might be pointed right to MP3 files; search for running shoes, get a shopping site. Such enhancements will help Google's chances of staying ahead, and that can only be good for Kordestani.
